Private equity investment provides numerous growth and diversification benefits. You could use venture capital pursuits for cutting-edge tech startups as well as buyout funds to assist existing companies achieve efficiency gains and greater market recognition.
Consider your personal risk tolerance and financial goals when making decisions about allocations. Diversifying by industry sector, region or company size helps spread out risk more evenly.
Buy & Build Strategy
Buy-and-Build strategies have long been used as an effective method for driving returns at PE firms. But in order to reach its full potential, this strategy requires regular acquisitions that complement its economic environment.
At the core of this strategy is its reliance on senior debt financing for add-on acquisitions and multiple arbitrage. As interest rates rise, however, this financing option becomes ever more costly, potentially diminishing returns from add-on acquisitions while depressing overall returns from this strategy.
To overcome this challenge, private equity firms must form strong relationships with business owners well in advance of any intention to sell, in order to be top of mind when the time comes and be best prepared to seize any opportunities that present themselves.
LBO Strategy
Under leveraged buyout (LBO) strategies, private equity firms enact purchases using both their own money and loans from outside sources to acquire companies they plan on improving before selling for a profit later on. High levels of debt increase both returns and risk.
Private equity professionals typically structure LBO deals using a mix of senior secured debt, subordinated debt and, less frequently, mezzanine debt instruments to create an in-depth financing model that incorporates these debt instruments as well as their respective repayment schedules and tax implications.
The model also evaluates a company’s ability to service its debt load based on earnings, cash flows, and financial health metrics. It estimates its exit value using an assumed enterprise valuation and projected internal rate of return; additionally it examines any impact from seasonal revenue declines on meeting debt payments or operating costs, along with potential cost cuts or margin-enhancing strategies.
Buyout Strategy
Buyout strategies involve private equity investors purchasing large stakes or whole companies for themselves and using both cash and borrowed funds as investments to pay back these purchases over several years, with the aim of improving profit margins so they can later sell at higher prices or at least yield better returns than would have been achieved from holding stock directly.
TPG Capital and Goldman Sachs saw great success when they acquired Alltel in 2007, just at the right moment as mobile technology was expanding rapidly. Within one year they sold it off to Verizon at an excellent return.
distressed funding is another profitable strategy, in which private equity firms seek to assist financially struggling companies like those facing bankruptcy by changing their management or altering the business model. In these situations, distressed funding deals provide private equity firms with an opportunity to help these businesses regain stability by restructuring management or revamping business models.
Growth Strategy
Private equity investors look for higher return opportunities than the more risk-averse public markets and raise capital from institutional investors such as pension funds, public and private insurance companies, university endowments and high net-worth individuals.
LBOs represent one of the primary strategies within private equity and involve purchasing existing companies using debt financing and restructuring them in order to improve operational efficiencies and increase value for their investors. By using debt to purchase companies, investors may also reduce initial capital requirements while taking advantage of any tax advantages provided by certain structures used in an LBO deal.
Growth equity investments target companies that already have proven business models and growing revenues but are beyond the initial startup stages. Their goal is to improve performance and ultimately lead to an IPO or acquisition. Private equity investments tend to be less liquid than other asset classes and often require making commitments that last several years or even decades; however, secondary market trading options for PE funds have recently become available.